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Business transparency in the fight against financial crime

Sylwia Wolos  Head of European Operations, Enhanced Due Diligence Services

Sylwia Wolos  Head of European Operations, Enhanced Due Diligence Services

Corporate vehicles are used in a variety of ways for legitimate business activities. However, they also form an attractive way for the criminals to disguise and transfigure the proceeds of their crimes. Their illicit uses include laundering the proceeds of crime, facilitating tax avoidance as well as other financial crimes. In order to circumvent regulations and legislation controls, corporate vehicles can be misused to disguise the identity of criminals and the true source of their funds or assets.

The lack of transparency in corporate vehicles has made it very difficult for competent authorities involved in financial crime investigations to ascertain the true identity of the person or persons who own and control a company. The complex international ownership structures and hidden beneficiaries of businesses have made it a very difficult task for financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) to comply with Anti-Money Laundering (AML) and Anti-Bribery and Corruption (ABC) regulations. The hidden beneficial ownership challenge also impacts the effectiveness and efficiency of a firm’s Know Your Client (KYC) and Know Your Supplier (KYS) programs.

Finding out who you are really doing business with has never been so important and yet so challenging.

The ways beneficial ownership can be obscuredShell companies, formal nominee shareholders and directors, complex ownership and control structures and more

Enhancing business transparency – a challenge to all

In its 2006 Recommendations, the Financial Action Task Force (FATF) stipulated that the misuse of corporate vehicles could be significantly reduced if accurate information regarding both the legal owner and the ultimate beneficial owner, the source of the corporate vehicle’s assets, and its activities were readily available to the authorities. FATF’s current Recommendations 24 and 25 cover transparency and beneficial ownership of legal persons and arrangements. However, FATF has noted that the implementation of these particular Recommendations has proved to be challenging. As a result, in October 2014, the task force published a guidance paper to assist countries in their implementation of Recommendations 24 and 25.

The promotion of the transparency of legal arrangements has been on the agendas of the governments of the largest economies too. Two of the most noticeable events in recent years have been the 2013 G8 Summit, when the participants endorsed the core principles on beneficial ownership, consistent with the FATF standards, and published action plans setting out the steps they will take to enhance transparency. Most notably, the British prime minister made a personal commitment to create greater transparency in British registered companies through making it a requirement for those companies to have a public register of their beneficial owners. In November 2014, the G20 leaders adopted a policy document containing 10 principles intended to improve the transparency of beneficial ownership of companies and trusts.

Recently, the International Monetary Fund (IMF) has conducted a regulatory review for the United States within its Financial Sector Assessment Program. In its findings, it has stated that despite significant improvements in the U.S. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations, the country has failed to address the lack of transparency of American corporations and trusts. The IMF published a clear and strong recommendation for the U.S. authorities, to “expeditiously take steps to ensure that accurate beneficial ownership information of U.S. corporations and trusts can be accessed by the competent authorities (…) by: requiring that such information is collected and maintained by either registries of corporations and trusts (…) and requiring all FIs and DNFBPs, in particular trust and company service providers (TCSPs) including lawyers and accountants providing such services, to identify the beneficial owners of corporations and trusts and take reasonable measures to verify those identities.”

The need to enhance transparency in business has also been on the priority list for charities and nonprofit organizations in the fight against corruption. Perhaps most remarkably, it has become a widely discussed subject in the social media space. Society has been gaining awareness of how the lack of visibility in corporate structures can have a negative effect on the economy. To name some examples, a 2012 special report by Reuters highlighted how one of the high-street, coffee-shop chains avoided paying taxes on the profits it made in the UK through a complex corporate structure; this led to a wide media debate and in turn to customers boycotting the chain. Not only did this action have an enormous negative impact on the company’s reputation, it also resulted in changes to the chain’s tax maximization practice in the UK.

Transparency International has been leading successful campaigns to reveal the misuse of corporate vehicles and the funneling of “dirty money” into the UK property market, and how this directly impacts the property prices in the country’s capital. The social pressure and an increased social awareness in the UK have had a definite influence on the delivery of the government’s commitment.

Changes in the UK – Small Business, Enterprise and Employment Act 2015

As with the fight against corruption, the UK seems to be taking the lead in increasing clarity in business ownership. The UK Parliament has already signed off on the Small Business, Enterprise and Employment Act 2015. The Act is to be implemented in phases and it is anticipated it will be fully in force by April 2016. The regulation requires changes to the Companies Act 2006 in order to provide better transparency in corporate vehicles. The Enterprise Bill contains complex provisions which will lead to both the creation of registers of persons with significant control over most companies and the creation of a central register at Companies House. Most notably, the Schedule 3 amends the Companies Act 2006 to require companies to keep a register of people who have significant control over the company. The Act abolishes the issue of share warrants and makes provision for the arrangements by which share warrants issued in the past are to be converted into registered shares or cancelled. In pursuit of transparency, there is also a requirement for all company directors to be natural persons: “A person may not be appointed a director of a company unless the person is a natural person.” However, the Act provides a few strict exceptions from that rule, as listed under section 156 B.

The UK government commitment to enhance the transparency in the ownership of UK companies and increase trust in UK businesses is being translated into one of the first regulations that can significantly help to fight corruption, money laundering and financial crimes by making it more difficult to hide behind corporate vehicles. The sooner this change happens in other financial economies, the easier it will be to prevent and detect the crimes committed through the complex grids of corporate vehicles, which in turn will have a positive impact on the world economies.

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Get more details on issues for finance lawyers and the Small Business, Enterprise and Employment Act.

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